For many businesses, the New Year means it’s time to file last year’s taxes. Do you have all your numbers ready for year end closing? What does accounting year end include? This includes profits, sales tax collected, inventory, detailed lists of expenses including payroll, losses, vehicle use, supplies, vendors, utilities, rent, insurance, interest on loans or credit cards…
If you answered “no” and you’re probably feeling overwhelmed, it could be that believing any or all of these five misconceptions made running the financial side of your business more complex than necessary.
The good news is that it’s not too late to simplify and it’s the perfect time to get the facts on how to make the next year-end closing a lot smoother.
To better understand common misbeliefs and the truth behind them, I spoke with Theresa M. Joslin, E.A., owner of Guthrie Tax Service, Inc. in Redlands, California. As an E.A., or Enrolled Agent, she is licensed by the United States Treasury Department and has met strict ethical and educational requirements.
Let’s look at the top five myths about accounting and uncover the truth behind each one.
Myth #1: Accounting is all math.
Accountants certainly use math, but accounting encompasses understanding the law, tax code, and how they apply to your business.
“Accounting is a high-level process that looks at business progress and makes sense of the data compiled by a bookkeeper by building financial statements,” Joslin said. “As an accountant, I can explain things so you can make better decisions.”
An accountant can analyze the big picture of your financial situation and offer strategic advice. He or she can produce key financial documents, such as a profit-and-loss statement, and can file taxes for you.
When closing out your fiscal year and getting ready to file your taxes, you’re doing much more than adding up a list of expenses and income. You need to understand how laws and the tax codes—local and federal—apply to your business.
Myth #2: An accountant is only good for doing your taxes and I have software for the rest.
As we just mentioned, an accountant can help with and file taxes, but the real value of working with an accountant is their expertise and on-going training.
Tax codes and laws change constantly and a good accountant stays current through professional groups, seminars, online training, and lots of reading. To stay current on what’s new, what’s old, and what can lead to penalties or missed deductions, an accountant can spend as much as 10-15 percent of their time per month just on professional development.
“What business owner has the time or wants time for that?” Joslin said.
When it comes to software, the right solution set up the right way not only helps with the year-end process but allows you to monitor the financial health of your business throughout the year. An accountant can advise you on setting up your software so that you can generate a year-end report in less than a day, rather than losing a few weekends to shoeboxes full of receipts and Excel spreadsheets.
“I cannot help you in April,” Joslin said. “But the sooner we connect the better. A business is in no place to just wing it.”
Myth #3: I’m a sole proprietor so I don’t need a separate bank account.
The answer depends on the nature of your business, your current financial situation, where you live and do business and your long-term plans.
A sole proprietorship, such as operating under a “Doing business as” (DBA) or “Fictitious business name” (FBN), does not require a bank account dedicated to your business, but it can make life easier for record keeping, especially at tax time.
Because a DBA or FBN is indistinguishable from you, the owner, the income earned by a sole proprietorship is income earned by you. Your profits and losses are filed along with your personal 1040. When filing, you must differentiate between business and personal expenses; comingling funds can lead to missed or disallowed deductions, resulting in more higher taxes.
Note that limited liability corporations (LLCs), partnerships, and corporations are legally required to have separate bank accounts for business and personal finances.
Even if you don’t “hire” an accountant full time, a one- or-two-hour consultation can help keep you on track and help you understand if a sole proprietorship or S-type corporation, for example, is your best option.
Myth #:4 Accountants are too expensive.
Why? This answer depends on the value you place on working with a professional compared to the potential cost of making errors because you either filed incorrectly, did not file on time, or missed opportunities for deductions. And, of course, the value of your time spent on myths one, two, and three, and dealing with the IRS if there is a discrepancy.
For example, would you rather pay a 10 to 25 percent penalty plus late filing fees or pay a professional accountant to help avoid those fees and get the most out of the tax code?
“Simple changes can cost you your business,” Joslin said. “Like, what are the implications for giving employees benefits versus raises or a bonus? To fumble around with no guidance or advice can be costly.”
Myth #5: Accounting is only for men.
Women equal or surpass the percentage of men in this profession.
- In Canada, 50.5 percent of all auditors, accountants, and investment professionals are women.
- In Europe, 64.3 percent of legal and accounting professionals are women.
- In the US, 63 percent of all accountants and auditors are women. However, women still earn less than men in both the US and Canada. A recent article in Forbes, Supporting Women’s Accounting Leadership, explores why that is and what we can do.
The take away here plays into how you select the accountant you want to work with.
First, don’t limit your choices to accountants who are men. Second, rely instead on references, areas of expertise related to your needs, and licensing and certification. Finally, go with your gut. Is this someone you can easily communicate with? Like any other professional, finding the right person is a personal choice to develop a working relationship built on trust and respect.
So for this year and next year, here’s some simple advice:
“Make an accountant part of your success team, even if it’s a consultation to set up your business or for a review yearly,” Joslin said.